Municipal New Issuance: The negotiated calendar for the past week was once again very light with only about $5.2 billion in issuance. With the continued lack of supply many issuers have seen strong demand for their bonds with issues well over subscribed allowing underwriters the opportunity to reprice to tighter levels. Some of the largest deals for the week were the $827 million Pennsylvania Economic Development fund taxable issue, the $350 million State of California Public Works Board issue of tax-exempt bonds which AmeriVet was a Co-Manager on. San Diego County CA Water Authority issued $271 million in green revenue bonds. Each of these issues showed large investor demand which each of the managers took into consideration and were able to reprice the bonds to tighter levels and lower interest rates that investors accepted.

Municipal Secondary Trading: Secondary trading for the week was very active as there was roughly $30 billion in total trading volume with about 53% of the total volume being clients buying. With the lighter new issue calendar investors have continued to look to the secondary market in an effort to put cash to work. Mutual fund inflows remain strong adding $2.0 billion to municipal bond funds last week and inflows have been positive for the past 5 weeks. According to Bloomberg client bids-wanted totaled to about $2.73 billion for the week which has been the average amount we have been seeing this year.

Municipal Spread: Municipal bond yields continue to rally as the Bloomberg 10-year benchmark yield fell by 8.3 basis points to 0.923% down from the previous week of 1.00%. With this rally we did see municipal ratio fall as debt maturing in 10 years is now yielding 57.94% of Treasuries compared to 60.60% a week ago and 62.59% one month ago as well. With the reduction in yields across all maturities we did see the municipal bond curve flatten by 4.9 basis points to 154 basis points.

This week ending on Wednesday investors added about $2.25 billion into municipal-bond mutual funds according to Refinitiv Lipper US Fund Flows data. This inflow follows the previous week’s inflow of $2.1 billion. Of the $2.25 billion of inflows, $1.28 billion was added into high-yield funds which is a record amount since fund started to be tracked beginning in 1992. This is a sign that many investors are searching for yield and are willing to accept a higher degree of credit risk. With President Biden’s consistent talk of higher taxes it is not surprising that investors are still pouring money into municipal bond funds as it remains one of the few ways to avoid paying taxes on investments. Even as spreads have narrowed between credit sectors municipal bonds remain more attractive versus other fixed income debt as they continue to outperform those markets.

One important market issue that has been talked about for municipal bonds since President Biden’s proposed infrastructure bill is the return of tax-exempt advanced refunding’s which went away with the Tax Cuts and Jobs Act back in 2017. If this option does return this could save state and local governments billions of dollars. According to Bloomberg of the $3.2 trillion tax-exempt market roughly $300 million was used for some refunding purposes. Which makes $2.9 trillion of the remaining markets could have some future refunding opportunity. In 2017, just before the Jobs Act was enacted Bloomberg calculated that about 12% of municipal debt would have been affected if advanced refunding did not exist that year.

One potential downside of the return of tax-exempt advanced refunding would be the drop in sales of taxable municipal bonds. In 2018 taxable bond issuance totaled to just $7.5 billion for refunding purposes, this was when the 10-year treasury was 130 basis points higher than it is today. If you fast forward one year that amount totaled $38 billion with an additional $11 billion of refunding and new-money issuance, and in 2020 that number doubled to about $87 billion or about 62% of issuance.

Municipal Supply: The negotiated calendar for this week will pick up from the prior week with an expected volume of $7.12 billion. The largest and most notable issues will cover almost half of the issuance for the week. The largest deal of the week which AmeriVet will be part of the syndicate will be the $1.3 billion Triborough Bridge and Tunnel Authority (MTA Bridge and Tunnels) which will include tax-exempt as well as taxable bonds. The next largest deal of the week will be the $1 billion State of Connecticut which AmeriVet will also be part of the Syndicate. The State of California will issue $1 billion in General Obligation Refunding Bonds which will have forward delivery. The State of Washington will also bring $607 million to the market next week.